Animal Farm

The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, July 20, 2015.

We have arrived. The global statist nightmare is here. Orwell must be rolling over in his grave.

Process associated with decentralization away from the West, and America, along with all corrupt and collusive centralized political bodies around the world, continues to accelerate, as increasing numbers become disenfranchised and frustrated with vulgarities associated with bureaucracy in general. As these vulgarities manifest, primarily measured by fishering income disparities between the pigs (high level bankers, politician's, and oligarchs) and their dogs (all strata of bureaucrats), and the barnyard animals (the public), one sees a global picture characterized by what has become a real life rendering of Orwell's Animal Farm. If you are not a benefactor of the larger bureaucracy you are a victim on one level or another - both directly and / or indirectly.

It's not difficult to see if one is looking. The bureaucrats are working harder than ever to maintain the illusion by increasing authoritarian powers and accelerating the confiscation of public wealth; while have-nots are fighting to keep what they have. In this regard, we see the genesis of increasing varieties of organization designed to return power to the people, with political innovation and crypto at the forefront. Certainly, the trials and tribulations associated with Greece are evidence of this. As Nigel Farage suggested before the politicians sold its people into slavery, in the long run Greece would have been better off to reclaim its sovereignty from the EU, where a move away from kleptocracy is inevitable. Unfortunately due to political corruption, process on this level continues to be retarded, not reflecting the will of the people - however with a little luck this will change (here too).

But not before the bureaucrats exercise every last measure available to them, evidenced by how the Chinese are dealing with their crashing stock markets (increasing authoritarian power), to the secretive trade agreements (TPP and TTIP) these clowns are ramming down their constituents throats in support of increased central planning and corporatism. (i.e. public wealth confiscation / theft.) And while these increasingly desperate measures will eventually exhaust themselves as the vandalism and barbarism associated with our modern day charade (neo-fascist, neo-feudal, sovietized organizational structures) hiding behind the lie of democracy becomes even more apparent, in the meantime one should prepare for more atrocity and vulgarities associated with the pigs and the dogs of this world - the elites and their bureaucrats. (i.e. think increasing corruption, wealth confiscation, and loss of liberty.)

European bureaucrats are hoping other periphery members in servitude will continue to bend like Greece, as they surely will until politicians with spine are put in place. As Paul Craig Roberts points out here, this is already the case in Portugal, Spain, and Italy, as well as Nigel Farage's Independence Party in the UK, and Marine Le Pen's National Front in France. And while this kind of revolution might sound far fetched today, come election time in the States next fall, if Donald Trump gets in (spoiled Americans want a benevolent dictator to take care of them), a revelation that is not as far fetched as it may sound given accelerating stress in the US economy, stranger things have happened. (i.e. it might not seem probable now to status quo thinkers but look at his numbers.) What's more, we may not have to wait that long to witness revolution on the global scene if Chinese stocks keep imploding - hence the increasingly draconian measures to halt the slide.

Fast forward two weeks, and we still have over 1,000 Chinese stocks suspended, along with something like $150 billion worth of derivatives in dispute, that will eventually need to be properly valued (written off?) at some point depending on whether these securities ever trade again. With Chinese stocks down 10% since the intervention (two weeks ago), it should be realized these markets are literally imploding (Shanghai is down 25%), where despite Western markets best efforts to ignore this fact, eventually this will matter. Of course if stocks ever start to really become unglued in the New York, well, they just shut the exchange again before anybody gets too excited - right. Funny though; when stocks are going up it works just fine no matter how radical the move. The steepest decline in three-years for the CBOE Volatility Index (VIX) this past week, and subsequent gain in the S&P 500 (SPX) / VIX Ratio, is evidence of this observation. (See Figure 1)

With all this its safe to conclude, Western tunnel vision, perception management, and manic moments are approaching a climax, where as discussed numerous times previously if we see a blow-off in the SPX / VIX Ratio into month's end up into profound Fibonacci resonance related resistance at 220, we will finally have the preconditions for a lasting top in stocks. And sure enough, it looks like we may witness this blow now because we have a five-week options cycle running into August, meaning the influence of post-expiry ratios will be minimized over the next two-weeks running into month's end. The strong weekly close with technology leading right into expiry on Friday shows the larger blow-off is accelerating, where as you can see below, it won't take much more to get the risk adjusted NASDAQ to what we thought was a more aggressive Fibonacci resonance based target might stop the rally, but will more likely only pause the advance if last week's performance is any indication. (See Figure 2)

Further to this, we also have the NASDAQ / Dow Ratio continuing up into 'bubble territory' defined by the extremes of the 2000 tech bubble, where as posited previously, while it's unlikely this top is bettered here, the boys and girls in la la land will undoubtedly give it their best shot, possibly pushing the envelop into 'extreme bubble territory'. Again, this likely means more gains into month's end. So, let's not speculate how high we go, but observe and react intelligently at the right time, which will largely be decided by how the options players react to all this. They've got to be getting tired of this routine, not too mention poorer. Average hedge fund performance is still terrible because too many of these knuckle heads are hedging excessively. One of these days unit holders will figure this out and fire them. Until that day arrives however, the perpetual short squeeze is on in tech as the open interest put / call ratio for the QQQ (see here) is still rising with prices. (See Figure 3)

And with Greece fixed (heavy on the sarcasm) German stocks should resume their outperformance of the Dow, where if we are lucky a double bottom matching the year 2000 low will be vexed in coming days, giving us yet more (technically profound) confirmation a top in the larger global stock market universe should be expected. (See below.) Such an occurrence must come at some point given the extreme condition of the present bubble blowing episode, given this one was always going to run longer with central planners bound and determined to stay ahead of it, as opposed to attempting to control it. (i.e. think ZIRP, NIRP, etc.) Unfortunately for them however, because of diminishing returns associated with debt based currency regimes, the world is now facing a debt crisis unparalleled in human history, where delusional bankers and their politician's will soon be unable to hide the rot and misdeeds any longer short of the distraction of war. (See Figure 4)

But for now, everything still looks fine and dandy on the surface. The pigs and dogs have the rest of the barnyard animals under control. Commodities and precious metals are being managed down with what appears to be the greatest of ease, and stock markets up. Both the Dow / Gold Ratio (DGR) and SPX / SLV Ratio broke to the upside last week, as warned, where in keeping with accelerating manic conditions, terminal blow-offs have now been set in motion, with the only question being 'how high they go?' As you would know in following my work, the answer to that question most likely resides in the math of Fibonacci extensions, where for our purposes, the 167 target on the SPX / SLV Ratio looks like a show stopper, allowing for some overshoot all things considered.

That is to say, considering the magnitude of this turn, with everything from faulty and fraudulent pricing mechanisms to intensifying deflationary forces to consider, if silver were to blast past $14 (which would likely push the SPX / SLV Ratio above 167 temporarily) down to the next support at $12.50, this would be understandable. (i.e. overshoot.) Any way you stack it however, buying silver (or gold) when the SPX / SLV Ratio hits the 167 mark represents good value even if overshoot to the downside occurs, where once wrongheaded speculators are punished sufficiently, and deflationary forces run their course, a profound (secular) turn back up can be expected. In fact, with the breakout in the SPX / SLV Ratio last week followed by its rapid acceleration higher, where this morning this acceleration is very apparent with both silver and gold down again, it's safe to say we are likely in the final blow-off, again, with the only question being will the 167 target contain the advance.

I see the speculators are attempting to bounce silver substantially, with the bid in the larger equity complex helping the margin players. Don't be fooled by this. Gold and silver, and especially the shares, will not bottom until stocks turn lower first, and it could take up to six-months of deferential selling before enough damage is done to create the conditions for a lasting turn. So please, don't get caught up with these knuckleheads. There will be plenty of time to accumulate positions. Once the DGR hits 17.5 and the SPX / SLV Ratio hits 167 one can begin to accumulate bullion again, however the shares could still plunge further until HUI hits the 80 area, or lower. So, keep this in mind, because there is always the risk of overshoot on the HUI target as well.

Heck, it could go all the way back to 35 in theory. It depends on how stubborn the aggressive speculators in the options markets remain - believe it or not.

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